Failing Health Care Co-ops Will Cost Taxpayers

Consumer Operated and Oriented Plan Programs (COOPs) were really a political compromise between Members of Congress who wanted a public plan option and those who didn’t. Once the Affordable Care Act passed, COOPs had outlived their usefulness. However, they are now failing and will cost taxpayers plenty. Senior Fellow Devon Herrick testified before a congressional committee.

Under the new systems in Chile, Argentina and Mexico, women receive retirement income from three sources: own annuities, joint annuities and a public benefit. In the following discussion, we consider the relative impact of each source for different subgroups of women: by education, labor market participation and marital status. All values in this paper are expressed in 2002 U.S. dollars.

Impact of Own-Annuities from Personal Accounts. The average woman ends up with an own-annuity that is approximately the same relative to male annuities in Chile and Mexico - 30 percent to 45 percent that of the average man - and less than 30 percent in Argentina. [See Appendix Table I and Figure I.] These ratios rise at higher educational levels because of the positive correlation between education and female labor force participation.

Despite its lower female labor force participation rate, Mexico jumps ahead of Argentina and on par with Chile because it has decreed equal retirement ages (65) for men and women. If the retirement ages were equalized in Chile and Argentina, the monthly annuity of women would rise almost 50 percent, even with work experience unchanged, because interest would accumulate for five years more and the annuity would be paid for five years less. But even full career women who work as much and retire at the same age as men get only 65 percent to 75 percent as much as men because of large wage disparities.

Impact of the Public Benefit. Disparities in annuities funded by personal accounts are narrowed by transfers through the public pillar - the minimum pension guarantee (MPG) in Chile, the social quota (SQ) in Mexico and the flat pension in Argentina. [See Appendix Table II and Figures VII, VIII and IX.] Women who receive the public benefit end up well above the poverty line. These transfers raise the female/male ratio of total retirement income and produce a higher rate of return on contributions for women than for men.

Low lifetime earnings may stem from low wage rates or low work experience. In the United States, our progressive defined benefit formula gives a higher return to those with low lifetime earnings, but studies have shown that often the low earnings are due to low years of work rather than low wage rates.26 Policy makers thus face a trade-off between equalizing benefits and reinforcing work incentives. Each of our three Latin American countries has chosen a different way to deal with this trade-off.

Chile's Minimum Pension Guarantee (MPG). The MPG is targeted toward low earners, but it discourages further contributing work by those who have met its eligibility requirements.

The MPG as an income floor. The MPG sets a floor on the real value of pensions of qualifying workers. The MPG floor in 1994 was $78 per month, about 27 percent of the average male wage, 37 percent of the average female wage and 125 percent of the poverty line at that time. If the worker's own annuity is less than the MPG, the government tops it up to the minimum level.27

The MPG as insurance against partial labor force attachment and deterrent to postponed retirement for low earners. The MPG does not cost very much, because it is narrowly targeted. Chile requires at least 20 years of contributions for eligibility; this limits the number of eligible workers and the size of the requisite top-up. Since the average male worker in every educational category is projected to accumulate an own-annuity far above the floor set by the MPG, he never needs a top-up. In contrast, the average female with primary education or less gets a small top-up to her own-pension from the MPG (equivalent to 18 percent or $12 monthly), which helps to narrow the gender gap for low earners. Most women with secondary education or more have own annuities that exceed the MPG. Raising the number of years for eligibility to 25 or the female retirement age to parity at 65 would bring the own-annuities of almost all qualifying women above the MPG level so they would lose the MPG top-up for their entire period of retirement. Current rules discourage additional work or postponed retirement by low-earning women.

Wage versus price-indexation of MPG. These projections are based on the assumption that Chile's MPG retains a constant purchasing power through time, as with price-indexation. This means that it will gradually decline relative to rising wages and own-annuities - part of the reason our simulations show it to be received by only a small proportion of pensioners. However, in fact the MPG has kept pace with wage growth through ad hoc increases. By 2002 it had reached $105 for pensioners below age 70 and $114 for pensioners above age 70. If ad hoc wage indexation continues, it will reach $172 (in 2002 dollars) by the time young workers retire. A much broader group of women (and even some men), extending through the secondary education level, would then receive a top-up. The top-up for women in the lowest educational category would rise from $12 to $106 monthly. This would decrease the gender gap considerably but it would cost much more than a price-indexed constant value MPG and would further reduce the incentive to work and contribute beyond 20 years.

Argentina's Two-Tiered Flat Benefit. Most women are not eligible for the full public benefit in Argentina because of the long work history required for eligibility.

Eligibility for the full flat benefit - not for women. Argentina pays a flat monthly benefit of $77 (in 2002 U.S. dollars) as an add-on rather than a top-up to the worker's own pension. It is about 30 percent of the average male wage, 45 percent of the average female wage and 130 percent of the poverty line. Thirty years of contributions are required for eligibility. Most men in all educational categories meet this requirement and receive this benefit, starting at age 65. Because it adds a substantial constant amount to a disparate contribution-based annuity, it is very effective at equalizing pensions between high- and low- earning men. However, most women are ineligible for this flat benefit because they work less than 30 years - except for those with a university degree, who can begin receiving the full flat benefit at age 60. This is the converse of the eligibility situation in Chile.

Reduced basic benefit for women. Most women are eligible for a reduced basic benefit of $54 at age 70, which accrues to workers who have more than 10 years of contributions. Although small in absolute terms, compared with the woman's own wage and annuity benefit it is quite large. It doubles the monthly pension of the average woman with less than secondary education and trebles the monthly pension of women with incomplete work histories (the "10-year woman") at age 70. This leads to a sharply contrasting situation between women at ages 65 and 70: at age 65 the female/male ratio of monthly pension is much lower than in Chile or Mexico, but at age 70 it jumps up to the same range as Chile and Mexico - with the added cost borne by the public sector.

Discontinuous link to years worked. Argentina's attempt to extend a minimum benefit to all, while also rewarding work to some extent, leads to puzzling pattern of work (dis)incentives. Women face a large reward for working 10 years in the formal labor market, but no marginal benefit from contributing to the public pillar over years 10-29; but if they work 30 years, they receive the full flat public benefit. Argentine policymakers are now considering eliminating the reduced flat benefit or linking it more continuously to years of service.

Mexico's Social Quota. The Social Quota (SQ) - a uniform payment by the government into each worker's individual account, per day worked - is 5.5 percent of the minimum wage (initially 1.8 percent of the average male wage and 2.6 percent of the average female wage) for every day worked. Thus it is roughly a one-third match to the average-wage worker's contribution to the private pillar. It should produce an annuity that is about 10 percent of the average wage for the full career worker. It provides greater work incentives than the public benefits in Chile or Argentina.

Mexico also has an MPG, but 25 years of contributions are required for eligibility. Most men have an own-annuity that exceeds the MPG while many women don't. However, the average woman in all educational categories fails to accumulate enough years of contributions to be eligible.

Distributional Effects of the Public Benefits. Differences in the design of the public pillars in these three countries have quite different distributional effects on subgroups among women, and formal work is rewarded differently.

Lifetime Net Benefits. Measuring the present value of public benefits and lifetime taxes used to cover these benefits, to the point at which the individual reaches age 65, we find that low earners, and especially women, receive net benefits in all three countries. Furthermore, imputed taxes are lowest and the subsidy is largest for women in the lowest educational categories. [See Appendix Table III. Also see Appendix I for discussion of imputed taxes.]

Effects of Labor Market Experience. Benefits from the individual accounts are directly linked to work and contributions in all three countries. But the public pillars reward formal labor force attachment quite differently. Mexico offers the most consistent rewards for work, since the SQ payment is proportional to days worked. Full career women who retire at 65 get the largest lifetime net transfers. In Chile work is strongly encouraged by the low tax cost of the MPG, but lifetime benefits from the public pillar decline for women who work more than 20 years or postpone their retirement beyond age 60. In Argentina a substantial net subsidy goes to women who work only 10 years, financed by taxes on high-earning men and full career women. The work disincentives from the flat public benefit and high taxes in Argentina partially offset the positive work incentives stemming from the individual accounts.

Intra-Household Transfers from Joint Annuities. In all three countries, the largest impact on lifetime pension benefits by gender stems from private intra-household transfers from husbands to wives through the joint pension. For most subgroups these transfers are much larger than those through the public pillar. [See Appendix Tables IV and V.]

Survivors' Benefits while Husband Is Working. In countries with traditional defined benefit systems, such as the United States, survivors' benefits to widows are paid out of the common pool and are usually 50 to 100 percent of the husband's potential benefit. This means that married households are subsidized by singles, regardless of income. In contrast, in the new Latin American multipillar systems, working husbands are required to purchase survivors' insurance for their wives, in place of this inter-household subsidy. A small amount of the total contribution (less than 1 percent of payroll) is used for this purpose.

Joint Annuities after Retirement. All three countries require husbands to purchase joint annuities (or take gradual withdrawals spread over both lives) when they retire. This creates a widow's benefit. In Chile and Mexico the survivor gets at least 60 percent, and in Argentina the survivor gets 70 percent of the primary benefit. The joint pension is a way to extend beyond the husband's death an informal family contract in which wives stay out of the labor market to provide services at home, and in return husbands support them monetarily. The average widow's benefit after the husband's death is greater than her own-pension, and it adds 30 to 70 percent to her own-annuity on a lifetime basis.28 [See Appendix Table Va Vb.]

The joint pension is especially important because a widow's cost of living is estimated to be roughly 70 percent of a couple's cost, due to household economies of scale. The widow's benefit plus her own benefit maintains household purchasing power at 70 percent to 80 percent of the previous level, so her standard of living is unchanged. The joint annuity also protects women who did not work at all in the formal market. The joint pension requirement may crowd out voluntary savings and insurance purchases in some households. However, there is little "crowd-out" effect for the many couples who do not save. Empirical evidence indicates many families do not save and insure enough to smooth lifetime consumption of all members.29

The joint pension requirement raises the female/male ratio of total lifetime benefits until it reaches 60 percent to 90 percent for the average married woman and 100 percent or more for full career married women. [See Appendix Table VI and Figures IV through IX.] Full career single or divorced women or those cohabiting without a formal marriage, who do not get the joint pension, are estimated to have lifetime benefits that are 70 percent to 80 percent those of single men. [See Appendix Table VI.] Comparing the old and new gender ratios, we find that these improved due to the reforms in almost all cases, especially for married women. [See Appendix Table VI.]

Women Receive Both the Joint Annuity and Their Own-Annuity. Survivors' benefits after retirement are included in traditional social security systems. However, in the United States and most other countries, when a husband dies, the wife must choose between keeping her own benefit or the widow's benefit. In the new Latin American systems, the husband rather than the government pays the widow's benefit through the joint annuity. Since this is viewed as his property while the annuity the widow gets from her own contributions is her property, she is allowed to keep both. This allows her to maintain her living standard and encourages her to work, without imposing an additional burden on the public treasury.

As a result of these three sources of benefits, gender ratios improved after the reform and simulations show that the biggest gainers will be women with low levels of education (Appendix VI and VII).